For Immediate Release
NACM Congratulates Congress on Overhauling Commercial Bankruptcy Code
April 15, 2005: Columbia, Maryland—The National Association of Credit Management (NACM) applauds members of the U.S. House of Representatives, who on April 14, by a 302 to 126 vote, passed S. 256, known as The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The Senate passed the bill March 10, by a vote of 75-24. President George W. Bush has said he would sign the bill if enacted by Congress. The bill takes affect 180 days after the President signs it into law. NACM has been pushing for the Bankruptcy Code to be overhauled with regard to commercial bankruptcies over the last two administrations. Robin Schauseil, CAE, NACM President said, "NACM has worked tirelessly over the last five years to see that this bankruptcy reform measure, vital to commercial creditors, was passed. The benefit to the business credit community in the area of preferences, in particular, is enormous." Although the consumer aspects of the bill have received most of the media attention, she pointed out important measures vital to commercial creditors that were at stake, and have been addressed in S. 256. Those issues include: 1. The creation of an expedited procedure for small businesses in Chapter 11 2. Revisions in the treatment of preference challenges to creditors 3. Reclamation reform
Small Business Reorganization
NACM sought to create an expedited procedure to assist small businesses through a Chapter 11 reorganization process as expeditiously as possible. Clearly, the less time a small business spends in the reorganization process in the courts, the more assets are preserved in that estate for creditors and for the business itself. Under S. 256, a small business is defined as a company with $2 million or less in secured and unsecured debts (excluding debts owed to one or more affiliates or insiders). The hearing on the disclosure statement and hearing on confirmation of a plan of reorganization can be combined. The debtor has a maximum of 300 days from the date of the filing for bankruptcy in which to have the plan confirmed, and must have a plan confirmed by a maximum of 45 days after the reorganization plan is filed with the court. The ability to have a case converted from a Chapter 11 to a Chapter 7 is now subject to a higher standard than previously allowed. Debtors may use standardized forms and disclosure statements that will be developed by the Advisory Council to the Courts. Small business senior management is strongly urged, but not necessarily required, to attend all meetings with the trustee. Also, under a separate provision, S. 256 allows the courts to permit small businesses to serve as members of a creditors' committee if the small businesses more accurately reflect the aggregate debt load of the debtor.
Preferences
Previously, all payments made by a debtor to creditors within 90 days of a bankruptcy filing had to be returned to the debtor's estate, unless the creditor could prove that the payment was made in the "ordinary course of business". Typically, the amount of the preference action against small business creditors represented less than the cost of litigation to defend the payment regardless of the merits of the case. Preference recoveries rarely were returned to debtors' estates, and often paid only for the cost of issuing the preference challenges. NACM sought to curtail the blanket pursuit of preference recoveries against unsecured creditors. S. 256 addresses this issue by stating that there can be no preference recovery action brought against a noninsider business trade grantor if the aggregate amount of the preference is $5,000 or less. Amounts recovered with this threshold will increase the likelihood that preference recoveries will benefit all creditors, and not pay merely for collection efforts. Preference recovery actions against non-insiders seeking less than $10,000 must be brought to the bankruptcy court in the district where the trade creditor has its principal place of business. This should prevent the practice of allowing the trustees for the debtor to issue blanket preference challenges.
The test for whether a payment, under the preference defense provisions, is made in the ordinary course of business according to ordinary business terms has been expanded to include payment of a debt incurred by the debtor in the ordinary course of business between the debtor and creditor; payment made in the ordinary course of business or financial affairs between the debtor and creditor; or payment made according to ordinary business terms of the industry. This provision forces the court to look to the prepetition history between the debtor and creditor as a definition of ordinary course of business. Should there be insufficient history between the debtor and creditor, the courts can look to industry norms to determine ordinary course of business benchmarks.
Reclamation
NACM proposed a modification in the treatment of reclamation demands to afford greater relief to creditors under the Code. A provision in S. 256 gives the credit grantor the option of one of two approaches for relief under the reclamation code: the creditor can exert a reclamation demand, enjoying the return of goods delivered within 45 days; or, as an alternative, should the return of goods be impossible or impractical, the creditor may enjoy an administrative priority for goods delivered within 20 days of the filing. The bill creates a bright line test for administrative priorities set at 20 days prior to the filing for bankruptcy for the receipt of goods by the debtor.
Retail Lease Assumption
Because the bankruptcy courts had been willing to give debtors virtual unlimited opportunity to decide whether or not to keep the business open, the courts were very liberal in extending the time for the rejection or assumption of a lease. S. 256 proposes that a definite limit be set by which the tenant would be required to either assume or reject the lease. The bankruptcy court could not extend that for any reason. S.256 also mandates that nonresidential real property leases be rejected or assumed before the earlier of 120 days after the order for relief or the entry of order confirming a plan. If no plan is confirmed in the 120-day period, the period can be extended to no longer than 210 days with the consent of the lessor or court approval, so long as the trustee or debtor in possession has performed all post-petition obligations in a timely manner.
Homestead Exemption
Under current law, each state is afforded the prerogative of establishing a set of exemptions to benefit all creditors. However, states like Florida and Texas allow for an unlimited homestead exemption on personal property, effectively avoiding collection efforts. Congress is addressing these abuses by creating a federal treatment for homestead exemptions. S. 256 establishes a cap of $125,000 for homestead exemptions. However, the bill allows some accommodation for the prior state of residency of the debtor but generally a 1,215-day period is required to exempt property up to the $125,000 level. NACM believes this is a victory for commercial credit grantors, particularly small businesses. Says Schauseil, "It's been a long, drawn-out battle to get changes to the commercial Bankruptcy Code, but this new legislation is comprehensive in addressing reform, and was worth the wait." For more information on this bill, please visit www.nacm.org. ###
The National Association of Credit Management (NACM), headquartered in Columbia, Maryland, supports more than 25,000 business credit and financial professionals worldwide with premier industry services, tools and information. NACM and its network of Affiliated Associations are the leading resource for credit and financial management information and education, delivering products and services which improve the management of business credit and accounts receivable. NACM's collective voice has influenced legislative results concerning commercial business and trade credit to our nation's policy makers for more than 100 years, and continues to play an active part in legislative issues pertaining to business credit and corporate bankruptcy. Media Contact: Norma Heim Phone: 410-740-5560 E-mail: normah@nacm.org